This week’s chart highlights earnings growth estimates for publicly traded companies in Canada (red), the U.S. (blue), Emerging Markets (light blue) and Europe, Australia & the Far East (grey).
In the first column on the left, the average annual earnings growth is displayed for each market over the last decade. Notice Canada is second only to the U.S. at 6 per cent vs. 8 per cent. Also notice that analysts expect Canadian publicly traded companies to realize superior earnings growth relative to the U.S. both this year and in 2027 (red bar above blue bar).
The importance of this chart lies in the fact that earnings growth ultimately drives stock prices. Short-term movements in share prices can be caused by numerous factors.
However, in the long term, earnings play a critical role in moving share prices higher or lower. Companies that increase their earnings over time generally experience rising share prices while those companies who can’t grow their earnings tend to see flat or lower share prices.
Other factors which impact share prices include earnings, multiple expansion and contraction, but earnings growth is typically an excellent indicator of a stock’s direction.
What makes this data even more interesting is Canadian stocks are currently trading at a meaningful discount to their global peers.
Since 1998, Canadian stocks have traded between a 20 per cent discount on the low end to a 20 per cent premium on the high end relative to global peers. By our estimate, Canadian stocks are currently trading at a ~15 per cent discount to the average multiple of stocks in other markets which is near the bottom end of the range over the last 30 years.
The combination of these two factors (superior earnings growth and valuation discount) makes a compelling case for the potential outperformance of Canadian stocks in the near-term.
U.S. stocks have outperformed Canadian stocks on average historically due primarily to higher earnings growth from U.S. companies.
Superior earnings growth south of the border can broadly be attributed to higher growth industries such as healthcare and technology which represent a larger portion of the U.S. stock market relative to the Canadian market.
With earnings projections for Canadian companies expected to outpace their U.S. rivals this year and Canadian stocks appearing to be relatively inexpensive compared to global peers, the stage is set for the Canadian stock market to become the star of the show.
Eric Van Enk is a wealth adviser & associate portfolio manager with National Bank Financial in Medicine Hat. He is a graduate of the University of Calgary, as well as a CFA charter holder with 20 years of financial markets experience in New York, Toronto and Calgary. He can be reached at eric.vanenk@nbc.ca
